San Jose set to approve $7 million in Samsung incentives

SAN JOSE -- It wouldn't do much for the self-proclaimed Capital of Silicon Valley to watch one of its major technology firms pull up stakes and mosey on down to Texas. So the San Jose City Council on Tuesday is expected to approve a $7 million incentive package for Samsung Semiconductor to expand on North First Street instead of in Austin, which city officials said is competing for the tech giant's business.

The deal was outlined in an August signing ceremony at the City Hall Rotunda with Gov. Jerry Brown, Mayor Chuck Reed and Jong-Joon Kim, president of device solutions for Samsung Electronics. But the value and other details of the incentive package, which includes tax and fee breaks and equipment reimbursements, did not come into focus until recent weeks after negotiations between city and company officials.

Nanci Klein, San Jose's deputy director of economic development, said the deal is well worth it for San Jose.

"By retaining and growing Samsung," Klein said, "we get an upside we wouldn't be getting if Samsung chose not to grow here."

Even so, some in San Jose question such incentives, arguing they are unfair to other companies doing business and paying taxes in the city.

"California's economy in general and the city in particular will be better served with fewer taxes and regulations for all than with lower taxes and regulatory compliance costs for the politically connected," argued Almaden Valley resident Jerry Mungai, a retired semiconductor company worker.

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But Councilman Kansen Chu, who represents the north San Jose area, echoed Klein's concerns about global competition for companies and jobs.

"We're always, in my mind, in a competition with other states in the U.S. or other counties or cities in California and around the world," Chu said. "We have to recognize that we're in the epicenter, the capital of Silicon Valley, and we need to be mindful of how we can keep this status."

Samsung Semiconductor, based in San Jose since 1986, now has 370 employees in 200,000 square feet of office space. The company is a subsidiary of South Korea-based Samsung Electronics, the world's second-largest semiconductor maker, which in December announced a $4 billion expansion of its semiconductor fabrication plant in Austin, where it has been a major presence since 1996 and employs about 2,500.

San Jose officials said Austin was dangling not only Texas' lower taxes and energy costs, but reportedly also financial incentives many times richer than what San Jose is offering, though Klein added there was no way to confirm that.

"That's not a question Austin would answer," Klein said.

Samsung's San Jose expansion would replace existing offices with a modern, environmentally friendly research and development campus totaling 680,000 square feet in two distinctive 10-story towers with a restaurant and garage that will employ at least 2,000.

The deal signed in August calls for the state to provide research and development tax credits and cash reimbursement for employee training. The company also would receive enterprise zone tax credits worth $37,440 per employee for five years, and an economic development energy discount through PG&E.

"Our new campus will fuel employment and growth in the community and will be a landmark for San Jose, embracing the urban design guidelines developed by the city of San Jose."

The San Jose incentives include:

Expedited, 120-day permit approval. San Jose's planning director said design permits should be signed Monday.

A more than 50-percent reduction in traffic impact fees, which the City Council made available last year for projects of 100,000 square feet or more that are permitted before Jan. 3, 2013. City officials valued that break for Samsung at $3.9 million.

Up to $500,000 worth of reimbursements for production and assembly equipment purchases.

A 50-percent rebate on the city's 5-percent utility tax on gas and electricity for power usage over 10 years up to $2.6 million. City officials had initially suggested capping that incentive at $500,000 and basing it only on net new power usage. But they said they sweetened the offer based on Samsung and PG&E projections of the additional power usage at the new plant.

City officials argue the benefits of the project outweigh the incentives. The project would deliver $2 million a year in new property tax revenues. That money would help pay debts owed by the city's former redevelopment agency that have been a drag on the city's operating budget, and eventually benefit schools and local governments. San Jose would see an additional $168,000 a year in revenues for its general fund. And the city would receive an equal share of the $2.6 million value of the 50-percent utility tax rebate to Samsung over 10 years. That would add about $260,000 a year in revenues, substantially more than Samsung's current $45,000 annual utility tax payments for gas and electricity.

Klein also said the city is insulated in the event Samsung were to abandon the project. The traffic impact fee incentive is only paid upon completion of the building, and the city would continue to receive property taxes no matter who occupies it. The $500,000 equipment rebates have clawback provisions over seven years. And the utility tax rebate only gets paid if the company uses the power.

"We only pay if they use it," Klein said, "so there's no risk at all if they should leave."